Common Culprits of Overspending

Catch these long-range budgeting errors before they happen.

You are an expert at running the manufacturing side of your company, but estimating budgets for business expenses and production costs may not come as naturally. Unfortunately, inadequate planning for these costs can cause manufacturers to make budget-blowing mistakes; on the other hand, a solid understanding of costs at the start of annual planning can lead to fiscal-year success.

Costs for manufacturing companies come in two main categories: business costs and manufacturing costs. Here’s a look at some common budget mistakes in both areas, along with ideas for avoiding them.

Business Costs

Are you tasked with estimating budget line items, such as advertising, insurance, hospitality, training, banking fees, taxes, legal advice and accounting services? Watch for these potential issues:

Steep — and unpredictable — insurance cost increases. This problem is just a reality these days, especially when it comes to health insurance for employees. To avoid sticker shock, look for advice from insurance brokers (talk to more than one) and try to negotiate better rates.

Late payments. Scrutinize accounts payable figures. Late payers may be costing you money. Are you holding them accountable? Consider avoiding these customers in the future.

Credit card fees. When it comes to offering credit card payment options, be careful: You will pay vendor fees of roughly 3% of total charges. Think about offering a discount for cash payments.

Accounting and office staff costs. You may be devoting time and salaries to accounting and back-office processes that would be better directed at your core manufacturing competencies. You might find that you spend less if you use outside services to manage these tasks.

Travel expenses. Collaborating with customers is a must, but travel expenses can mount quickly. Use Skype or conference calls to eliminate some trips. And when you estimate the cost of outsourcing production, always include contingency travel budgets for the unexpected. For instance, it may cost more to get materials if a shipment falls through.

Manufacturing Costs

Two key areas may cause you to underestimate your budget:

Unexpected production schedule disruptions and downtime. Delays that snarl the production schedule can give rise to overtime pay and late shipments. Waiting for replacement parts or a service technician, or slip-ups in any of the broad range of areas involved in making complicated products with tight turnaround times can disrupt schedules. Defects, material shortages or rush jobs can interfere with production, too, and one delay often will cause another.

To counter these inevitable hiccups, ask your scheduler to build flexibility into production schedules and manufacturing capabilities. Consider whether it’s time to update or replace an older IT system that manages your shop floor. Other solutions include better training for service technicians, so they can solve problems faster, and intentional maintenance plans. Start with these three accepted strategies: preventive maintenance; predictive maintenance, a planned maintenance schedule based on likely failure timelines to avoid reactive maintenance[1] and total productive maintenance (TPM), a holistic approach to equipment maintenance with the goal of perfect performance.[2]

Cost estimating for quotes. Cost estimating trips up many manufacturers. They may rely on historical costs, average costs or “feel” to quote a job, which often results in underestimating the actual cost of the work being performed. Ensure your profitability through a painstaking analysis of the actual costs likely to be incurred given the job’s specifications. Factor in actual direct labor hours and wages, the cost of outsourced processes, as well as packaging, shipping and other costs. If a job isn’t worth taking on, don’t do it.

Control the Optimism and Get Support

Planning the year’s budget is a tricky process. Being realistic, or even considering a worst-case scenario, will help you avoid surprise expenses. Some experts say to build in a contingency fund of as much as 20% of revenue. To keep your budget in tune and look for money leaks, consult your CPA and tax advisor regularly. And don’t forget to turn to your banker, a key resource for sharing ways to safeguard cash flow, operate business processes and plan for your future.

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